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Chapter 2: Issues in International Trade Documentation
CHAPTER 2
Issues Concerning Trade Documentation
WITH SO MANY DOCUMENTS , issuers of documents, documentary requirements, different countries, different languages, unique laws, and the involvement of money, there are bound to be a number of issues that relate to the content, form, and presentation of documentation in international trade. Most of these can be described in broad categories, others are very specific and relate only to specialized transactions. Fortunately, few traders will be faced with all the issues described in this chapter. However, being an informed trader will have a significant impact upon your ability to deal with issues as they come up. RECOMMENDATION : Read this chapter now and then again after reading the whole book. Some concepts cannot be fully integrated without reading the chapters that follow.
Country of Export Document Requirements
Most countries require at least basic documentation for all export transactions. For simple transactions with non-regulated commodities and goods, this may only include a commercial invoice, bill of lading and export declaration.
At the other extreme, extensive documentary requirements may be required for certain goods including export licenses, export permits, authorization from other governmental agencies, and pre-shipment inspections. In extreme cases, export approval may require a vote of the country’s national legislature or executive power. In certain countries, proof of pre-shipment payment or foreign exchange documentation may also be required. EXCEPTION : Export from and import to member nations of a regional trade pact (such as the European Union) may require little or no documentation whatsoever.
See “Introducing the Export Authority” on page21.
Country of Import Document Requirements
Most countries require at least basic documentation for all import transactions. For simple transactions with non-regulated commodities and goods from nonregulated countries of export, this may only include a commercial invoice, bill of lading and import declaration.
At the other extreme, extensive documentary requirements for the import of certain goods may require import licenses, import permits, authorization from other governmental agencies, and pre-shipment inspections. In certain countries, extensive regulations concerning payment in hard currencies add an additional set of restrictions and require extra documentation.
Some countries restrict imports by imposing difficult import documentation requirements with the view of protecting domestic producers. Such restrictions are non-tariff barriers to trade and are the subject of great controversy. EXCEPTION : Export from and import to member nations of a regional trade pact (such as the European Union) may require little or no documentation whatsoever.
See “Introducing the Import Authority/Customs” on page22.
Trade Relationship of the Countries of Import and Export
The nature of the trading relationship between the country of export and country of import can have a significant impact upon export/import requirements, tariffs and duties, as well as the number and type of documents required.
Most countries have a four-tier system of trade relationships with other nations. Each tier represents a different level of requirements regarding the ease of trade, amount of duties charged and documentation required.
TIER 1: SPECIAL TRADE STATUS At tier one, two or more nations have entered into a special trade relationship.
Examples include the European Union (EU), NAFTA (North American Free Trade
Agreement), and Mercosur (Southern Common Market). Nations that are a party to such an agreement pledge to remove most or all tariff and non-tariff barriers to trade. In the case of the EU, virtually all barriers have been removed. NAFTA is an example where tariff and documentation requirements are being gradually reduced, but not entirely eliminated.
TIER 2: NORMAL TRADE RELATIONS (FORMERLY MOST FAVORED NATION ) Normal trade relations are those between countries that are friendly but not part of a Regional Trade Agreement. This includes the vast majority of trading relationships in the world. Non-excessive trade requirements, tariffs and documentation requirements are the norm. Examples include the trading relationships between the USA and France or between Indonesia and Italy.
TIER 3: RESTRICTED TRADE RELATIONS In restricted or limited trade relations, trade with a subject nation is permitted, but significant restrictions apply. Export or import of certain listed goods is restricted, quantities may be limited, high import duties or tariffs apply, and stringent documentation requirements exist. An example of this was the trading relationship between the USA and China before the USA granted China Most Favored Nation (now called Normal Trade
Relations) status. One could import goods to the USA from China, but the duty rates were extremely high and served to restrict trade.
TIER 4: EMBARGO In this situation, all trade with the subject country is banned. An embargo can be unilateral (such as the USA’s 30 year embargo of Cuba), or multi-lateral (such as the UN’s sanctions of Iraq as a result of events related to the Gulf War of 1991).
Terms of Sale
The terms of sale establish the obligations of the buyer and the seller with respect to the place of delivery, who bears the cost of delivery, and who bears the risk of loss or damage to the goods while in transit. The terms of sale also have an impact upon who is responsible for providing documentation.
At one extreme, the seller may be required only to place the goods at the disposal of the buyer at the manufacturing facility. The buyer is responsible for picking up the goods, export formalities, transportation, import formalities and final delivery to his place of business in the country of destination. In this case, the seller may have no obligation to provide documentation other than a commercial invoice. The buyer, however, generally asks the seller to provide specific documentation to help in export and import formalities. This is generally handled by a documentation requirements clause in the sales contract or letter of credit.
At the other extreme, the seller may be required to deliver the goods to the buyer at the buyer’s place of business in the destination country. In this case, the seller is responsible for providing and presenting all documentation required for export, transportation, insurance, and import formalities.
INCOTERMS 2000 The ICC (International Chamber of Commerce) in Paris developed
INCOTERMS (INternational COmmercial TERMS), a set of uniform rules for the interpretation of international commercial terms defining the costs, risks, and obligations of buyers and sellers. First published in 1936, these rules have been periodically revised to account for changing modes of transport and document delivery. The current version is INCOTERMS 2000. For an illustrated guide (29 pages) to the 13 Incoterms 2000 we recommend the
Dictionary of International Trade (4th edition or later) also by World Trade Press.
Method of Payment
When the buyer and seller agree to prepayment or credit terms, banks are not involved other than with the cashing of a payment check, the sending of a bank wire or handling a credit card payment. However, with a documentary credit or documentary collection, bank involvement and documentation can be significant: ■ DOCUMENTARY LETTER OF CREDIT In this case the buyer applies to the bank for the issuance of a letter of credit naming the seller as beneficiary. The buyer also lists specific documentation the seller must present as a requirement of getting paid.
The documents listed are those required for import formalities as well as additional documents that might include inspection and insurance certificates. ■ DOCUMENTARY COLLECTIONS In this case the seller instructs the bank to issue a collection order for an individual shipment to the buyer. The seller presents to the bank the documentation the buyer requires for the importation of the goods.
The seller’s bank transfers these documents to the buyer’s bank which then requires payment or a promise of payment (according to the terms of the collection) from the buyer in exchange for the documents.
NOTE : As with all matters involving money and payments, the form and content of these documents is of great importance to all parties to the transaction. Subtle differences between forms and subtle changes in wording can tip the balance between a successful and an unsuccessful transaction.
See “Banking Documents” starting on page76.
The Nature of the Goods Traded
Document requirements for export and import are very closely tied to the level of regulation of the goods by either the country of export or the country of import. The simple rule: each additional regulation adds an additional document that must be obtained from or presented to a governmental agency. In some cases, one document may be required for export from the country of origin while a different document is required for import to the country of destination.
Regulated goods fall into a number of categories:
RESTRICTED GOODS Broadly, restricted goods are those that pose or have the potential of posing economic, health, environmental, safety, cultural or moral risk to the citizens of the country of export or import. Examples include natural resource commodities, drugs, food, alcohol, animals, motor vehicles, medical devices, toys, chemicals, cultural relics, and morally or politically questionable literature. Another category includes products of threatened species of plants and animals (especially those covered by international treaty). Documentation requirements include licenses, permits, sanitary certificates, and inspection certificates. These documents generally originate from or are submitted to governmental agencies with specific regulatory powers.
PROHIBITED GOODS These include goods that are completely illegal to export either from the country of origin or to import to the country of destination. Note that some goods may be legal to export but illegal to import. Usually, these are goods that pose significant and demonstrated economic, health, environmental, safety, cultural or moral risk to the citizens of the country of import. Examples include: certain natural resource commodities; drugs, animals, insects, food products and agricultural products; medical devices that have not met the standards of the country of import; toys, cultural relics (especially those covered by international treaty) and morally questionable literature; and agricultural products originating from an area infested with pests or plant or animal diseases.
STRATEGIC GOODS These products and commodities relate to a country’s security interests and may be heavily regulated, restricted, or prohibited. Examples include arms and armaments, radioactive materials, high technology (including hardware and software), biological vectors, and aerospace products. Documentation requirements include licenses, permits and inspection certificates and these originate from governmental agencies with specific regulatory powers.
QUOTAS Quotas are quantitative limits placed upon the importation of goods from all countries or specific countries. They are generally placed on manufactured goods that threaten a country’s domestic industry and are a highly politicized issue. Examples of goods often subject to quotas include steel, automobiles, textiles, and textile products. Documentation requirements include licenses, permits, and visas. A visa is an endorsement in the form of a country of export stamp on an invoice or export control license. Visas are a self-imposed restriction on exports to a particular country. Visa stamps are bought and sold as they guarantee the ability to export and then import certain products to the destination country.
The relationship of the parties to a transaction make documentation either more or less complex. Parties who know each other well are more likely to trade on an open account basis. This eliminates the need for letters of credit or documentary collections procedures that involve banks. Also, with trust, the buyer is less likely to require inspection certificates. Examples include businesses that have long and successful trading histories, or companies that are owned by the same parent company. On the other hand, if the parties have not had previous dealings with each other, or are fearful of doing business with each other, one can expect intense banking and inspection requirements and documentation. NOTE : Regardless of their relationship, both the exporter and importer will be required to fulfill country of export and country of import documentation requirements.
Distance and Geography
The greater the distance and the more varied the geography between the buyer and the seller, the greater the likelihood that multiple modes of transport will be required to get a shipment to its final destination.
This can result in either a shipment made in distinct and discreet stages with separate documentation required for each stage of the journey, or a combined multi-modal shipment made under a single set of documentation. However, even in the latter case, documentation and instructions tend to be more involved.
Originals vs. Copies
There are two broad issues that relate to “originals” in international trade documentation: 1) When are originals required?, and 2) What is an original?
WHEN ARE ORIGINALS REQUIRED? Certain steps in the export and import process require the presentation of
“original” documents. Export and import authorities, banks, government agencies and buyers often specify that they receive original documents. The most important example of this is the “negotiable bill of lading.” Along with the commercial invoice, this is one of the key documents of international
trade. It may be even more important than an invoice when it is the “title document,” possession of which is evidence of ownership of the particular shipment. Clearly, a “copy” of this document is not the same as the original.
In general, originals, of all specified documents should be included in the “document package” presented to the buyer, banks, or transport company, unless copies are requested or allowed. NOTE : The original negotiable bill of lading should only be handed over when the seller is prepared to pass title to the shipment to the company receiving the document.
WHAT IS AN ORIGINAL ? Since several “originals” may be required, this can be an issue of some confusion. The general rule is that copies made on a copier or computer printer or even carbon copies can be an “original” provided they have been marked
“ORIGINAL” and signed, in ink (blue ink is preferred) by the authorized individual and any required stamps or seals also appear. The expanded use of electronic signatures makes this issue even more pressing as a computer printed document with an electronic signature can now be an original. The general rule is that copies marked “ORIGINAL” are accepted so long as the parties to the transaction agree.
BANKING CONSIDERATIONS Unless otherwise noted in a letter of credit, banks are authorized to accept documents as originals, even if they were produced or appear to have been produced on a copy machine, by a computerized system, or by carbon copy, provided they have the notation “ORIGINAL” and are, when necessary, signed.
FAXED DOCUMENTS In the 1980s the proliferation of fax machines created an interesting issue: Were documents received by fax considered “original” documents? “Fax” is an abbreviation of facsimile, which means exact copy. However, an exact copy is not an original. Worldwide trade practices needed to keep up with the times, and modern practice accepts that facsimiles can be used, at least for some documentation, so long as both parties to the transaction agree that it can be so used.
ELECTRONIC DOCUMENTS In the 1980s and 1990s the proliferation of computers and EDI (Electronic
Data Interchange) created a new question: Can an electronic document be
“official” or “original”? In theory, if the document is in the computer system, there may never actually be a “hard copy.” In most cases this has been answered, yes, so long as the parties to the transaction agree.
Ambiguity as to Issuers and Authentication of Documents
Most documents in international sales transactions are generated or obtained by the exporter in the country of export. Although this is a burden, it is considered a necessary part of providing good service to the buyer. The buyer assists in the process by specifying exactly what documents as well as what certifications or
authorizations are required. The buyer specifies these needs in the context of the sales contract, letter of credit or even a letter sent by fax or e-mail.
Two types of problems arise, however, when the importer does not specify the requirements in sufficient detail. They are:
ISSUERS OF DOCUMENTS If the importer/buyer does not name a specific issuer of a document, or if the issuer is referred to by such terms as “first class,” “well-known,” “qualified,”
“independent,” “official,” “competent,” or “local” (especially a certificate of origin or an inspection certificate), the exporter/seller is essentially being asked to make its own decision as to who should issue the document. In the case of documentary letters of credit, banks are authorized to accept whatever documents are presented, provided that the documents appear on their face to be in compliance with the terms of the credit and were not issued by the seller. The import authority in the buyer’s country of destination, however, may not accept a certificate of origin or an inspection certificate (such as a sanitary certificate) unless it was issued by a specific authority in the country of origin.
AUTHENTICATION OF DOCUMENTS The importer/buyer may state that a document be “certified,” “notarized,” or
“endorsed.” What is meant by these terms varies considerably from country to country and an exporter, in good faith, may try to comply with the requirements for a specific document yet end up with a seal or signature that is unacceptable to the importer or import authority. Once again, in documentary letter of credit transactions, banks are authorized to accept documents as presented so long as the authentication appears to be consistent with the requirements of the credit and other stipulated documents. To avoid problems, the buyer should know what documents are required, what authentication is required, and whether a specific issuer is required. These requirements should be communicated to the seller in list form in the sales contract or in the documentary letter of credit.
Document Dates
There are a number of issues that revolve around document dates. Examples: ■ What if a contract states that delivery to the shipping line must be made by
February 15th and the bill of lading is dated February 16th? ■ What if the seller is responsible for providing insurance coverage for a shipment, the date of the bill of lading is February 16th, but the insurance certificate establishes the start date of insurance as February 20th? ■ What if a document has been dated 06/07/01? In the USA this means June 7, 2001.
In Europe it means 6 July 2001.
In many cases exporters don’t pay attention to the written and firm requirements of sales contracts and letters of credit and do a sloppy job of export documentation. Keep in mind that customs authorities and regulatory agencies are known to stick to the rules when traders present documents with even the
slightest irregularities. The best approach is to be extremely conscious of all issues related to dates in sales contracts and letters of credit.
NOTE : Unless otherwise noted in a letter of credit, banks are authorized to accept documents dated prior to the issuance date of the credit, so long as all other terms of the credit have been satisfied.
Signatures and Seals
Most every form in existence has a signature line at the bottom and many documents in international trade need a signature to be valid. A signature is considered to be the formal certification by the person signing that the information in the form is true, or that they agree to be bound by the terms and conditions listed in the document.
A signature, often in blue ink to differentiate it from the black type of most documents and copies of documents, is also used in conjunction with the word “ORIGINAL” to indicate that a copy is to be considered an original copy.
In some instances, a company “seal” is used in addition to a signature to indicate that the company is an existing entity with authority to transact business.
With the advent of fax machines, electronic documents, and the Internet, the question of what constitutes a valid signature has become an issue; one that has not been completely resolved. Generally speaking, the parties to a transaction can agree upon what constitutes a valid signature. For example, many firms accept a faxed contract or inspection certificate as valid, while others maintain that only the actual hand-signed original is valid. Also, certain documents, such as the negotiable bill of lading must still be in its original hand signed form to be valid. NOTE : Unless otherwise instructed, banks in letter of credit and documentary collection payment situations are authorized to accept documents that have been signed by facsimile, perforated signature, stamp, symbol, or other mechanical or electronic method.
Consistency Among Documents
The largest single issue in the preparation, presentation, and verification of documentation by sellers, buyers, and banks is consistency among documents. EXAMPLE: In examining the documentation for a letter of credit transaction involving the sale of five pieces of machinery, the buyer noticed that the commercial invoice listed the net weight as 12,140 kilograms and the gross weight as 12,860 kilograms. The bill of lading, however, listed the gross weight as 9,612 kilograms. What happened to the other 3,248 kilograms? Did the seller make a mistake in preparing the invoice? Did the shipping company make a mistake in preparing the bill of lading? Did the seller forget to ship one or more pieces of machinery? Did the shipping company misplace some machinery? Did someone steal the machinery? The seller should have noticed the inconsistency before forwarding the documents to the advising bank, which should have noticed the inconsistency before forwarding the documents to the issuing bank, which should have noticed the inconsistency before forwarding the documents to the buyer. The buyer will certainly reject this documentation and withhold payment until account is made for the missing 3,248 kilograms.
Other consistency problems: ■ Incorrect names and addresses can divert a shipment to the wrong party or hold up a shipment until information is verified. ■ Different quantities of goods listed on invoices, packing lists and other documents add an element of uncertainty in the eyes of the importer, banks and authorities. ■ Errors in documents or failure to follow instructions in a documentary letter of credit can result in a refusal of payment by the bank or by the buyer. ■ Inconsistencies in paperwork are an automatic red flag to customs officers who become much more likely to order time consuming and costly inspections.
As each document is prepared, presented and verified, it should agree in all particulars with the information included in the contract of sale, the commercial invoice, the bill of lading and the documentary letter of credit (if used).
See “General Consistency Checklist” on page174.
Document language
Some countries of import may require that all import documentation be in the language of that country. This can include the commercial invoice and other documents that must be translated before they will be accepted.
Securing Documentation
An international trader may come to a complete understanding of the documentation required for a transaction, but a complete standstill in trying to secure it in a timely manner or at all. This can be the result of a government’s mindless bureaucracy, purposeful bureaucracy (as a non-tariff barrier to trade) or corruption at either low or high levels. Dealing with this issue in detail is not within the scope of this publication.
Generally. . .
Regretfully, the words “generally,” “usually,” and “often” appear many times in this book. International trade documentation is a business with many complicating factors and the particulars of each transaction determine document requirements.
The editorial format throughout this book is to describe the basic transaction first and then list the exceptions or complicating factors.
A complete understanding of international trade documentation, and its rules and exceptions, will come only from a combination of study and practice.
